SGH - Slater and Gordon

McLovin said:

Call me skeptical...

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It seems more like the banking syndicate has restructured the debt so it can be sold. I just can't see how they can service this debt unless lenders take a haircut. There's lots of WIP, but who knows how much more money needs to be poured into those cases to realise the invested WIP? With no operational update at all it's pretty clear who's driving the ship and it's not Captain Grech.

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Anyone on the other side of the WIP would be offering them low ball settlements right about now in the belief that they need the cashflow.

skc said:

The funny thing about this stock is that there is no insto holders anymore... .plus there is no borrow anymore. So there's a good chance that it might go higher yet.

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It's a HC special. The trading in the shares was very predictable yesterday. Massive open then fade into the morning then base for a post lunch rally.

skc said:

Is the bank allowed to receive more regular operational updates (while the market remains unguided) while attempting to sell SGH's debt?

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Surely whoever buys the debt will want some pretty detailed info on the state of play.

Haven't heard from SGH for a long time since the bank facility amendment. And today they released a earnings guidance a week before actual earnings are due (I wonder why?).

It got punters excited in the morning but the stock ended down 10% by the close. So what did they say?

Normalised EBITDAW for full year expected to be $36.6m. H1 was -$17.8, implying H2 normalised numbers = $54.4m. Reported H2 EBITDAW is $8.9m, so the one-off's are some $46m.

Remember that the original FY16 guidance was for EBITDAW of $205m and operating cashflow of 100% EBITDAW. So management turns out to be off by about 80% on their transformative acquisition.

If you annualise the H2 normalised number, you can potentially hope for $100m+ EBITDAW for FY17... so there's hope. What we don't know is whether the H2 EBITDAW comes from NIHL cases which are probably not recurring.

They reported net debt to be $682m... compared to H1 figure of $741m. That's a drop of $59m in the books. However, much of that is Fx related. GBP to $A was 2.02 on 31 Dec 2015, and 1.787 on 30 Jun 2016. I don't know how much of their debt is in GBP (375m GBP is a number I have in my head somewhere)... but if it's 375m GBP then Fx alone would show a debt reduction of ~$87m. So it seems to me that they are still cash flow negative in H2.

However, if their GBP debt in a smaller number, and you consider $46m one-off's to be much cash, then there's a chance that they are cashflow neutral to slightly positive.

Let's see the actual numbers next week.

Well, some numbers came out. Many didn't like them.

• $1.02 billion full-year loss.
• $876.5 million impairment.
• Full year normalised profit of $49.7 million EBITDAW.
• Negative net operating cash flow of $104.2 million.
• Negative gross operating cash flow of $57.6 million.
• A $27.8 million adverse movement in WIP.

I'll leave this one to those who know what they are doing.

Now this is an interesting stock, interesting because it is just a ticking time bomb, a stock with explosive debt pushing EV to $1 billion by my calculation (incl. off balance sheet items) and a market cap about $150m, with EV/MC of 673%! This stock is on the very bottom of my list. There's four things I despise most in life: cockroaches, lawyers, politicians, big 4 accountants. In that order. And SGH doesn't have a good market reputation to say the least. Which is what surprised me when the directors are buying in early September.. any thoughts?

That is a nasty looking chart !!

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I won't be surprised if that chart drops to 0 in 2018 if the banks don't refinance

Boggo said:

That is a nasty looking chart !!

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I sold out last week, my one realized loser for the year over and done.

Maurice Blackburn class action about to kill Slater and Gordon with a massive class action representing 3000 share holders.

McLovin said:

Call me skeptical...

It seems more like the banking syndicate has restructured the debt so it can be sold. I just can't see how they can service this debt unless lenders take a haircut.

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6 months later... a tranche of debt has been sold at 38c in the dollar.

http://www.afr.com/street-talk/slat...8-cents-in-the-dollar-sources-20161106-gsjcl4

When debt trades at 38c, surely there's not much value in equity. Billabong's debt once traded around 80/85c before the eventual re-capitalisation, so perhaps there's hope. Still, 38c is a lot less than 80/85c.

skc said:

When debt trades at 38c, surely there's not much value in equity.

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With out any real depth of thinking, the thought occurs to me that its possibly a case of 'a bird in the hand is worth two in the bush' - or in this case 38% now is better than waiting to get an indeterminate amount later. (meaning that there may not be a direct corelation between the debt and equity valuation.)

skc said:

6 months later... a tranche of debt has been sold at 38c in the dollar.

http://www.afr.com/street-talk/slat...8-cents-in-the-dollar-sources-20161106-gsjcl4

When debt trades at 38c, surely there's not much value in equity. Billabong's debt once traded around 80/85c before the eventual re-capitalisation, so perhaps there's hope. Still, 38c is a lot less than 80/85c.

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The only value probably left in the equity is probably the ability to have first say in what happens to the debt.

You've got to read the delusion in the other place. I'm pretty sure when/if the liquidators are called in and start selling off desks and chairs that will be seen as positive news because it shows they're reducing headcount.

galumay said:

With out any real depth of thinking, the thought occurs to me that its possibly a case of 'a bird in the hand is worth two in the bush' - or in this case 38% now is better than waiting to get an indeterminate amount later. (meaning that there may not be a direct corelation between the debt and equity valuation.)

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Well it's a single OTC transaction so there could be a host of one off factors at play. However, we are talking about 38c in the dollar... so I think it's a pretty good indication of what at least one debt holder think of the equity value.

McLovin said:

The only value probably left in the equity is probably the ability to have first say in what happens to the debt.

You've got to read the delusion in the other place. I'm pretty sure when/if the liquidators are called in and start selling off desks and chairs that will be seen as positive news because it shows they're reducing headcount.

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I do venture there every now and then... I am pretty sure I read someone think it's positive when a stock is suspended. It means shareholders won't be facing losses.

Latests posts I read there:

Someone posted fair value is $5.70 by 2020 and then people congratulating each other for saving new investors who would have sold if not for their efforts to stamp out wrong opinions.

Hey guys does anyone have the link to join the Class Action against SGH? I bought last year (within the class action date range) and lost a lot. I heard it's not too late but can't seem to find the link for applying.

joeno said:

Hey guys does anyone have the link to join the Class Action against SGH? I bought last year (within the class action date range) and lost a lot. I heard it's not too late but can't seem to find the link for applying.

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https://www.mauriceblackburn.com.au...s/slater-and-gordon-shareholder-class-action/

They say "As proceedings have now been commenced, online registration for the SGH Class Action is no longer available."

Even if class actions wins, typically you might get back 3% if you're lucky.

I have been doing some thinking about my investment in SGH, it has had a significant negative impact on my SMSF, I am up over 14% on my benchmark, but would have been up 22% without the impact of SGH - so its pretty important for me to understand what went wrong.

Was it a bad decision or bad luck?

When I go back and look at my spreadsheets, research and analysis for my initial parcel bought in September 2014 for $6.14, i had decided they were the best of the businesses in the sector and also the best value at that price. I dont think it was a bad purchase at that price at the time, so to that point, not a bad decision.

I briefly considered selling out when SGH hit $8, it was then trading well above my calculated IV, but after some consideration I decided there was future growth likely to support the share price and I stayed in.

Then I bought more in the retail allotment in April 2015 at $6.37 - at the time SGH had recently hit its high of $8.00 and was still trading at over $7.50 so it looked a sensible decision to pick up another parcel - in hidsight it made things worse because I had averaged up into a company that was about to fall off the edge of a cliff.

I was away overseas on our gapyear when events started unfolding with the Quindell acquisition, so my focus may not have been as sharp as it should, but reading back thru the announcements around late June 2015 there is not anything too alarming coming into the public arena. I obviously wasnt happy with the price drop and issues arising but felt that the company would be able to ride them out.

The next big fall came in late November 2015 when the regulatory/legislative changes were proposed by the British government and was shortly followed by guidance about profit downgrades, by this time the market had enough and the end was nigh!

In hindsight the opportunity for me to exit and take a substantial loss, but protect my remaining capital was between June & November 2015 - but I chose not to and left my capital invested in SGH.

So the big question for me is, can I avoid future capital losses like this and if so how?

I guess step one is should I have invested at all? In hindsight I still think it was a reasonable decision with the information I had at the time, I think I have improved my analysis over time and I am not sure I would buy into a company with similar metrics now. So my increased rigour, expanded metrics and better understanding of businesses may be enough to avoid another SGH - but i have no real certainty about that!

Step 2 is should I have sold at $8, was that my big error? Again, in hindsight I dont think so, if I sold out of companies where their price had exceeded my initial IV then my portfolio would be much worse off. You dont get multi-baggers by selling when they go up 50%!

Step 3 is should I have not taken up the retail allottment? Given what I knew at the time, and the range of recent trading it seemed like a good opportunity and as per the prior point, if I had not taken up similar offers from other companies I have invested in my returns would be much lower.

Step 4 Should I have sold in Jue 2015 when SGH first gapped down significantly? The same problem arises, if I assume that is where I went wrong and in the future sell out of businesses that are subject to some bad news and the share price falls heavily - if I applied that retrospectively to my portfolio the losses would be much larger. (NWH is a good example)

Step 5 Was the mistake in not selling when the final straw came in late 2015 and any support for SGH evapourated? By then the capital loss was so significant that it wasnt something I even considered, trouble is that fall came pretty quickly and there is no certaintly that I would have been quick enough to get out anyway.

Writing down these thoughts has probably helped clear my thinking and my summary would be that there is probably not anyway for me to avoid the risk of a catostrophic outcome like SGH, sometimes I will get it wrong and lose money, but overall my strategy still sees me performing well ahead of my benchmark.

The main thing is that my initial analysis was probably sound enough, but there are a couple of aspects that I think were poorer thinking and I have already eliminated them, one was a sense that it was a sector that I should have exposure to, so I went looking for the best business to buy in the sector. I now no longer consider sector exposure as a metric. I only look at the quality of the business. I am also much more wary of debt and while it wouldnt have stopped me investing initially, it may have prompted me to exit sooner.

galumay said:

I have been doing some thinking about my investment in SGH, it has had a significant negative impact on my SMSF, I am up over 14% on my benchmark, but would have been up 22% without the impact of SGH - so its pretty important for me to understand what went wrong.

.............it may have prompted me to exit sooner.

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Just thought you might like some music with that.


Tip as soon as you hear the word accounting questions or problems - don't just sell, go short!

notting said:

Tip as soon as you hear the word accounting questions or problems - don't just sell, go short!

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That may be good advice!

I have uncovered something else about companies like SGH that had I known I would have probably never made the initial investment, "a business that is trying to build scale should show characteristics of operating leverage, or in simple terms, a 10% increase in revenue should lead to more than a 10% increase in profits for the business." - SGH were growing revenue by over 100% but were only able to translate that into NPAT growth of just above 20%. Thats a horrible conversion rate for something as simple as a rollup of legal practices!

So thats a learning for future reference!